North Carolina Trade Secret Law

North Carolina has adopted a modified version of the Uniform Trade Secrets Act.

As a business owner in North Carolina, you probably rely on many forms of intellectual property law to protect your company. These might include copyright, trademark, and patent law. Another important form of intellectual property is trade secrets. What laws protect your business's trade secrets in the Tar Heel State?

What Are Trade Secrets?

Trade secrets are a common and important form of intellectual property for businesses of all sizes. Trade secrets commonly include customer lists, sensitive marketing information, non-patented inventions, software, formulas and recipes, techniques, processes, and other business information that provides a company with a business edge. In legal terms, information is more likely to be considered a trade secret if it is:

not known outside of the particular business entity

known only by employees and others involved in the business

subject to reasonable measures to guard the secrecy of the information

valuable, and

difficult for others to properly acquire or independently duplicate.

Protecting Trade Secrets with Nondisclosure Agreements

Perhaps the most common way for North Carolina businesses to protect their trade secrets is by having employees sign nondisclosure agreements (NDAs), which are enforceable in this state (but not all states). These are written contracts between employers and employees that attempt to prevent the employee from disclosing confidential information after leaving the company.

For example, if you own a computer chip manufacturing plant in Durham, an NDA with an employee could prevent that person from disclosing your methods of production to a future employer for a certain period of time. The employee knows that if he or she discloses your proprietary chip manufacturing process, or misappropriates it in some fashion, your business will be able to sue for breach of the NDA.

Misappropriation of Trade Secrets in North Carolina

Although North Carolina has not formally adopted the Uniform Trade Secrets Act (UTSA), it has implemented a modified version with many of the same key principles. North Carolina’s trade secret law can be found at N.C. Gen. Stat. Secs. 66-152 et seq.

The statute defines a trade secret as "business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that: (a) Derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Moreover, the statute notes that the "existence of a trade secret shall not be negated merely because the information comprising the trade secret has also been developed, used, or owned independently by more than one person, or licensed to other persons." Put differently, this means that your company can claim rights over a trade secret even if that trade secret is licensed to, and used by, another person or entity.

North Carolina’s modified equivalent of the UTSA refers to the theft of trade secrets as misappropriation. Under North Carolina law, "misappropriation" means the acquisition of a trade secret by someone who knows that the trade secret was acquired by improper means, such as theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy. It also includes the disclosure or use of a trade secret without consent by someone who used improper means to acquire knowledge of the trade secret, for example, an ex-employee who spills company secrets to a rival.

Penalties for Misappropriation of Trade Secrets in North Carolina

Under North Carolina law, a trade secret thief can be prevented from disclosure by court order, known as an injunction. This is true for both actual or threatened misappropriation.

The injunction may be terminated when the trade secret has ceased to exist, but it may be also continued for an additional reasonable period of time in order to eliminate any commercial advantage that otherwise would be derived from the misappropriation. In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty. This can go on for no longer than the period of time for which use could have been prohibited. Exceptional circumstances can a theft that is so serious that any court order attempting to address it would be meaningless.

A victim of trade secret theft can also seek financial compensation that measures the actual loss attributed to the theft or the profits (or “unjust enrichment”) acquired by the trade secret thief. Under N.C. Gen. Stat. Sec. 66-154, the victim may recover actual damages, as measured by the economic loss or the unjust enrichment caused by misappropriation of a trade secret, whichever one is greater.

In egregious situations, a North Carolina court can award punitive damages, up to twice the amount of any award. Attorney fees will also be awarded in situations where a court finds that the misappropriation was willful and malicious.

Interestingly, North Carolina does carve out a unique exception to allow the "misappropriation" of a trade secret that is done in good faith. "A person who in good faith derives knowledge of a trade secret from or through misappropriation or by mistake, or any other person subsequently acquiring the trade secret therefrom or thereby, shall be enjoined from disclosing the trade secret, but no damages shall be awarded against any person for any misappropriation prior to the time the person knows or has reason to know that it is a trade secret."

Moreover, the statute provides that if that person "has substantially changed his position in good faith reliance upon the availability of the trade secret... he shall not be enjoined from using the trade secret but may be required to pay a reasonable royalty as deemed just by the court." North Carolina's somewhat unique statute therefore allows a good faith infringer of a trade secret to continue to use that trade secret in his or her own business, in certain circumstances, in exchange for a reasonable royalty fee, even without the consent of the trade secret's "owner."

Standard of Proof for Showing Misappropriation in North Carolina

North Carolina makes it somewhat difficult to establish a claim for misappropriation of a trade secret. Under N.C. Gen. Stat. Sec. 66-155, a plaintiff seeking an injunction or damages for misappropriation of a trade secret must establish that the "thief" both: "(1) Knows or should have known of the trade secret; and (2) Has had a specific opportunity to acquire it for disclosure or use or has acquired, disclosed, or used it without the express or implied consent or authority of the owner." As you can imagine, it can be difficult to prove actual knowledge to meet this standard. Consequently, plaintiffs in North Carolina will have a somewhat uphill battle in establishing their claim.

Statute of Limitations for Claiming Misappropriation in North Carolina

In North Carolina, an action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.

Federal Law on Trade Secret Theft

In addition to North Carolina’s rules regarding trade secrets, certain federal rules also apply in North Carolina. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner.

The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen. The Act’s definition of “trade secret” is similar to that of the Uniform Trade Secrets Act. The penalties for a violation of this statute include a potential prison term of 15 years and fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.